Mr. Mark Hoban (Fareham): May I clarify the process in my own mind? The thresholds will not require people to notify changes in their income during the year, and at the end of the year there will be accounts. When the reconciliation is done, a claimant will be required either to repay excess tax credit received or to receive a top-up tax credit for the amount that he has not claimed. That is what I believe will happen in the year-end procedure.

I should have thought that a claimant whose income varied significantly during the course of the year—perhaps somebody in seasonal work—would be well advised to submit a reassessment of their tax credit during the year, so that they did not have to make a significant repayment at the end of the year.

Is there scope in the guidance to encourage claimants to submit regular reassessments of their

Column Number: 77

need for tax credits where their earnings are seasonal or uncertain as a result of moving in or out of work? I am perhaps more concerned with the seasonal point than with people moving in and out of work.

Mr. Boateng: That would certainly be an issue for seasonal workers. In the discussion and the conveying of information between the Revenue and the claimant of the tax credit at the time of the application it would be advisable to point out, ''It may suit you to do this.'' There is no compulsion to follow that advice, but good sense would dictate that one should, in order to receive a steady, regular benefit as opposed to a hike at a time when it might not be so useful. The whole point, as we have said on a number of occasions, is to provide the income when it is needed. That is the advantage of the proposed system.

I know that this is not intended, but the amendment would make the system less flexible by restricting the scope of the regulations that could be made under clause 7(3), which I do not believe would be helpful. I hope that, in the light of my explanation, in which I have sought to address in some detail the points that have been made, hon. Members will not press the amendment to a vote.

Mr. Flight: Again I thank the Minister for a lucid explanation. I cannot help feeling that here we have an experienced counsel who has probably just about enabled all members of the Committee to understand how the provision will work. I think of myself sitting in a surgery trying to explain it to an average member of society and of the prospects of them understanding it. I am always uncomfortable with tax arrangements that people cannot understand, because if they cannot understand them, they may not know what they are entitled to, there is scope for error and so on. Although I appreciate why the clause has been so drafted and what it is designed to achieve, I warn the Government that proposing measures that ordinary people do not have a hope of understanding is an undesirable practice that invites trouble.

Mr. Webb: I am grateful to the Minister for putting on the record some matters that were not clear to me. He said that the majority—he may even have said the vast majority—of claims would be assessed on the basis of previous year's income. That is a significant statement, which offers some reassurance in respect of our concern about expecting people to forecast.

I should point out to members of the Committee that despite what the amendment paper says, my amendment is not about the funding of strategic health authorities and health authorities.

During Tuesday's proceedings I asked the Minister what happens when income changes exceed a particular threshold. That evening I found in my pigeonhole a written answer from the Paymaster General, which, he will be relieved to know, was consistent with the answer that he just gave.

I remain concerned about one aspect of the process. I shall give a simple numerical example. Let us say that a person's income is £100 one year, £130 the next, and the threshold is £20 a week. In these terms, that is a big change. The system will choose to ignore the £20, because that is the threshold, and assess only on the

Column Number: 78

basis of the £10, knocking off 35 per cent. or whatever the taper is. In that year, there will be a £3.50 or £4 adjustment. Suppose that in the following year the person's income does not change and stays at £130. His income has not changed between the two years but he will be assessed on a different income because in the second year the Treasury will again take account of the £20 width of the threshold, to stop the endless rolling over.

I know that there is a trade-off involved. However, I would find it difficult to explain to someone whose income had not changed between two years why their tax credit had fallen. One would have to say, ''That is because we disregarded it in the first year, but we have stopped disregarding it in the second year.'' That is quite a hard story to sell.

Mr. Hoban: The hon. Gentleman raises an important point. I should have thought that if a person's income exceeds the threshold—£20, in his example of £100 and £130—the end-yearly assessment should be on the £30, not on the £10.

Mr. Webb: My understanding of clause 7(3) is that one of the paragraphs stipulates that the bit that will be taken account of in the assessment is only the excess over the threshold, not the whole increase. There is no easy answer to this. If one says that small amounts will be ignored—there is a lot to be said for that in terms of administrative convenience—one cannot then, as soon as someone goes a penny over the threshold, take the whole lot, because that will create a huge discontinuity.

If the thresholds are big—again, that is advantageous in terms of administrative convenience—the jump in the following year for someone whose income has not changed at all will be that much bigger, because the whole width of the threshold will be taken into account, and the bigger the threshold, the bigger the jump the following year.

The amendment is not as rigid as the Minister suggests. We are trying to get at the fact that the presumption is the previous year's income and the circumstances in which one can choose the current year's income, including within-year reassessment for big changes. There is no mention in the amendment of those disregard concepts. I do not want to rehash a previous debate, but another reason why a 12-month assessment might be problem is that in 12 months there could be bigger changes, bigger jumps and one must worry more about thresholds, which would have to be bigger. However, we have tortured the point as much as we dare and I am reassured by the Minister saying that the vast majority of people will be on the previous year's income.

My only other worry is that the tax mentality system has been applied. There may be overpayment or under payment recovery the following year—perhaps through adjustment to the tax credit—and those of us who are used to PAYE income, income tax returns and catching up on previous years are familiar with that system. However, it is different for the claimants that we are talking about. Because the amount could be so great, they may have two years' worth of underpayments or overpayments to recover

Column Number: 79

and have to take in account further adjustments. I worry that things will get fiendishly complicated.

The amendment was getting at the simple point that trade-offs must happen. I remain concerned about the complexity of the proposals as they will affect the claimant. However, at least if most people are on the previous year's income, that offers certainty for advisers and claimants. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Ms Karen Buck (Regent's Park and Kensington, North): I beg to move amendment No. 86, in page 5, line 23, at end insert—

'(3A) The amounts prescribed under paragraphs (a) and (b) of subsection (3) above must not be less than £2,000.

(3B) The amount prescribed under paragraph (c) of subsection (3) above must not exceed £500.'.

Much of what we have discussed is germane to this amendment. Although I congratulate my hon. Friend the Minister on the clarity with which he explained the intention of clauses, I too found my ears gently seeping blood by the end of it. I do not encourage hon. Members to stray into naming a figure, but can we receive models, using a range of variations, of what the taper and threshold might be? We could then see examples of how the proposals might work in practice. I would then find it easier to understand and explain the implications of what is being said. I am sure that when we are in surgery and dealing with claimants the available briefing will include examples, but it would be helpful to the Committee, and on Report, to have such modelling now.

This is a probing amendment. We have already heard that Ministers will not be persuaded into naming a figure today and I am not expecting that. I am also conscious of the dangers of my amendment. There is a real risk that the more generous the amendment, the steeper the cliff edge when the calculation is made at the end of the year. I want to encourage Ministers in their representations to the Chancellor to be as generous as possible in securing a threshold. I also want to tease out a few more questions, some of which will be fiendishly technical and I am sure that I will not understand them. If we cannot have responses now, perhaps the Committee could be given written answers.

The argument for having a generous threshold is three-fold. It will reduce the level of overpayments. That is valuable because the experience that is coming through from Australia, about the level at which people face significant overpayments, is slightly concerning. We in this country do not have a culture, as the Americans do, which is used to significant year-end changes and calculations, which people build into their financial planning. We must be aware of that. The more that we can do to reduce the number of people facing those overpayments, the better.

The measure will reduce anxiety about overpayments. We mentioned earlier that many people, especially those who have been out of work

Column Number: 80

for a long time, do not have skills of projection and calculation. I hope that I am not being patronising, because I am not very good at them either. Those people might be discouraged from taking a little bit of overtime or extra work, or picking up another week or two seasonally, because of the difficulty of making a plan and their worry that there could be an unknown bill dropping on their mat at the year end.

10 am

The measure would also reduce the administrative burden, which is very important. The Revenue will be expected to take on a whole new level of work to deal with inquiries. I am confident that it will rise to that, but there should be the least possible burden on it.

In an earlier debate, the Minister made the important point that the whole tax credits policy, as well as its aim of welfare to work, is aimed at encouraging people to take greater responsibility for their own financial planning. That is absolutely right. I have no problem with it, and it is a healthy and good thing, but we are dealing with many people who are risk averse. That is one reason why many people have found it difficult to go into work in the first place. The more that we can find ways to help people to overcome that anxiety about taking risks, the better.

I wanted to include a generous threshold, and have set the figure at £2,000. That is slightly arbitrary, which is why this is very much a probing amendment. I welcome the fact that, as has been stated already, the thresholds will be asymmetric. That is very important, because there is no reason why we should not be more generous to people facing overpayments, and build in as tight as possible a safety net for people who face a drop in income.

I have a few specific questions. Can the Minister share a little more about how the threshold level will be determined when the figure is assessed? What calculations will underpin it, other than the pot of money available? Is it intended that the prescribed amounts in clause 7(3)(a) and (b) will always be the same? Given the specificity built into clause 7(3)(a), (b), (c) and (d), under what circumstances could clause 7(3)(e) apply?

If an amount were prescribed under clause 7(3)(d), tax credit entitlement would be based on a higher level of income than the claimant actually had. Obviously, lone parents, for example, are used to being on a low income, but the measure could cause severe problems. Do the Government intend to prescribe an amount under clause 7(3)(d)?